Highlights Of The 2010 Tax Relief Act

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”) into law. The Tax Relief Act was designed to extend Bush-era tax cuts while providing other incentives to revive the economy.

As the 2011 tax season is now officially under way, I thought I would provide my readers with a summary of key provisions of the Tax Relief Act, courtesy of Armstrong Teasdale's Tax Department:

Extension of 15 Percent Long-Term Capital Gains Rate. The Jobs and Growth Tax Reconciliation Act of 2003 (“2003 Act”) cut the top capital gains rate from 20 percent to 15 percent. The reduced capital gains rate was set to expire at the end of 2010. The Tax Relief Act extends the long-term capital gains rate of 15 percent through December 31, 2012.

Extension of 15 Percent Rate on Qualified Dividends. The 2003 Act cut the top individual rate on qualified dividends from 35 percent to 15 percent. The reduced qualified dividends rate was set to expire at the end of 2010. The Tax Relief Act extends the qualified dividend rate of 15 percent through December 31, 2012.

Payroll Tax Reduction. The Tax Relief Act provides all wage earners (including self-employed individuals) a one-year payroll tax reduction in the amount of Social Security taxes paid in 2011. The Social Security payroll tax will be reduced from 6.2 percent to 4.2 percent for individual wages earned in 2011 up to the taxable wage base of $106,800. The employer’s share of Social Security tax is not affected and will remain at 6.2 percent. Self-employed individuals will pay 10.4 percent on self-employment income up to the taxable wage base of $106,800. The tax reduction will provide a maximum benefit of $2,136 per wage earner.

AMT Patch. The AMT provisions were originally enacted to make sure that wealthy Americans did not escape paying taxes. However, the AMT has started to apply to more middle-income taxpayers, due in part because the AMT parameters are not indexed for inflation. In recent years, Congress has provided a “patch” to prevent the AMT from encroaching on middle-income taxpayers by raising the AMT exemption amounts. The Tax Relief Act provides a “patch” for 2010 in the amounts of $47,450 for individual taxpayers, $72,450 for married taxpayers filing jointly and for surviving spouses, and $36,225 for married individuals filing a separate return. The Tax Relief Act also provides an increased “patch” for 2011 in the amounts of $48,450 for individual taxpayers, $74,450 for married taxpayers filing jointly and for surviving spouses, and $37,225 for married individuals filing a separate return.

Extension of Repeal of Itemized Deduction Limitation. The 2001 Act repealed an overall limitation on itemized deductions applicable to higher income individuals for tax year 2010. The 2001 Act’s repeal was set to expire at the end of 2010 and the overall limitation on itemized deduction for higher income individuals was to have returned for tax year 2011. The Tax Relief Act extends the full repeal of the overall limitation on itemized deductions through December 31, 2012.

Extension of Marriage Penalty Relief. The 2001 Act, as amended by the 2003 Act and the Working Families Tax Relief Act of 2004, increased the basic standard deduction for married individuals filing jointly to twice the amount for single individuals. The increased standard deduction was set to expire at the end of 2010. The Tax Relief Act extends the marriage penalty relief through December 31, 2012.

Extension of Child Tax Credit. The child tax credit is a credit equal to a maximum of $1,000 for each qualifying child under the age of 17. The child tax credit begins to phase out at a modified adjusted gross income level of $110,000 for married individuals filing jointly. The Tax Relief Act extends the $1,000 child tax credit and income limitations through December 31, 2012.

Extension of the American Opportunity Tax Credit. The American Opportunity Tax Credit temporarily replaced the Hope education credit under the 2009 Recovery Act. The American Opportunities Tax Credit benefits qualifying families with college students. The maximum amount of the credit is $2,500. The credit begins to phase out at a modified adjusted gross income level of $160,000 for married individuals filing jointly. The Tax Relief Act extends the American Opportunities Tax Credit and income limitations through December 31, 2012.

Incentives for Businesses

One Hundred Percent Exclusion of Gain from the Sale of Small Business Stock. Under the Small Business Jobs Act of 2010, the gain from the sale of qualifying small business stock that is acquired after September 27, 2010 and prior to January 1, 2011 and held for more than five years is excluded from the income of a non-corporate taxpayer. The Tax Relief Act extends the exclusion for one more year, for stock acquired before January 1, 2012.

Research Tax Credit. Under pre-Tax Relief Act law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred before January 1, 2010. The Tax Relief Act retroactively extends the research credit for two years by substituting a December 31, 2011 expiration date.

Extension of Bonus Depreciation and Section 179 Expense. The Tax Relief Act makes 100 percent bonus depreciation available for the cost of qualified property placed in service after September 8, 2010, and before January 1, 2012 (through January 1, 2013 for certain longer-lived property and for transportation property). A 50 percent bonus depreciation is available for qualified property placed in service after December 31, 2011, and before January 1, 2013 (through January 1, 2014 for certain longer-lived property and for transportation property). Because the bonus depreciation percentage is increased to 100 percent, taxpayers avoid past limitations associated with Section 179, such as the $125,000 annual dollar limitation and the $500,000 taxable income limitation for tax years beginning in 2010 or 2011. The new limitations are $500,000 and $2 million, respectively.

Energy Incentives

Extension of Section 1603 Treasury Grant. Section 1603 of the tax title of the 2009 Recovery Act appropriates funds for payments to persons who place in service specified energy property during 2009 or 2010, or after 2010 if construction commenced no later than December 31, 2010. The grant program provides a grant in lieu of a tax credit equal to 30 percent of the qualifying project property costs for solar, wind, biomass, geothermal, fuel cell, waste energy, hydropower, and marine power projects, and 10 percent of the project costs for microturbines, thermal heat pump systems, and combined heat and power systems. The Tax Relief Act extends the start of the construction commencement deadline for one year so that taxpayers can elect to receive the cash grant in lieu of a tax credit for specified energy properties that are placed in service or for which construction begins on or before December 31, 2011. The application deadline for the grant is also extended by one year and must be received prior to October 1, 2012.

Non-business Energy Property Credit. The non-business energy property credit provided under Section 25C of the Internal Revenue Code provides an incentive to individuals to make energy efficient upgrades to their primary residences. Under the 2009 Recovery Act, this credit equaled 30 percent of the costs of qualified energy efficiency improvements and property, with a lifetime maximum credit of $1,500. The Tax Relief Act extends the non-business energy property credit through December 31, 2011 at a reduce amount. The reduced credit amount applicable for 2011 is 10 percent of the costs of qualified energy property placed in service in 2011, with an aggregate lifetime maximum credit of $500 for all tax years ending after December 31, 2005.

If you have any questions regarding the Tax Relief Act or any other tax issue applicable to you or your business, please contact a member of Armstrong Teasdale's Tax Department.

IRS Circular 230 NoticeInternal Revenue Service regulations state that only a formal opinion that meets specific requirements can be used to avoid tax penalties. Any tax advice in this communication is not intended or written to be used, and cannot be used by a taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer, because it does not meet the requirements of a formal opinion.